Procter and Gamble - no change in 2011Q2

In July 2010, we presented a model for Procter and Gamble (PG) which forecasted a period of growth from $59  in June (had fell from $62 in March 2010) to $63 in September 2010.  This model was defined by the index of food away from home (SEFV - CUUS0000SEFV) and that of rent of primary residency (RPR). The former CPI component led the share price by 3 months and the latter one led by 8 months. The prediction was right and the price reached $63.

For the past ten months, this model is also applicable with only change in the time lead for the SEFV – it is now 4 months. Overall, the model predicted a no change period. Figure 1 depicts the overall evolution of both involved indices since 2003. Considering the fact that the original model was valid for the period since September 2009, these two defining components have been providing the best fit model between August 2009 and March 2011.  Relevant coefficients are negative and positive, respectively. The slope of time trend is also positive.  So, the best-fit 2-C model for PG(t) is as follows:

PG(t) =  -5.4SEFV(t-4) + 2.93RPR(t-8)  + 18.16(t-1990) + 187.47

     

where PG(t) is the monthly closing price (dividend and split adjusted) in US dollars,  t is calendar time.

The predicted curve in Figure 2 leads the observed price by 4 months with the residual error of $2.14 for the period between July 2003 and March 2011. In other words, the price of a PG share is completely defined by the behaviour of these two CPI components.

The model does predict the share price in the past and foresees the period of no growth to be extended into the second quarter of 2011.

 

Figure 1. Evolution of the price of SEFV and RPR.

Figure 2. Observed and predicted PG share prices.

Rise in the price of food. How long yet?

We continue reporting on the evolution of the difference between core CPI and the index for food (beverages not included). In the previous post we confirmed that this difference had been following the long-term (negative) quasi-linear trend since 2001. The main question is when the difference will reach its bottom value and the trend will turn to a positive one. This pivot will manifest the change from increasing to decreasing food price. The importance of this event cannot be underestimated in the current political and economic situation in developing countries, where populations are literally starving.


Previously, we suggested that the remarkable rally in food prices had forced the index for food to grow faster than predicted and the deviation from the trend predicted in 2007 reached ~7 units in 2008 [1]. Originally, the predicted difference (red line in Figure 1) intersected the zero line around 2014.

In January 2009, the trend line was much steeper and crossed the zero line. In March 2011, the (black line) trend crosses the zero line in the end of 2010. Therefore, Figure 1 demonstrates that the difference between the core CPI and the index of food has been slowly approaching to its original trend (red line) since 2009.

Here we suggest that the intercept with the zero line and the pivot to the decreasing food price now seems to start in 2011-2012. The previous negative/positive pivot was at the level of -10, as displayed in Figure 2. If it is the case for the current situation the negative trend will change only in after 2016.

Figure 1. The difference between the core CPI and the price index of food. The pivot point to a positive trend in likely in 2011 or 2012.

Figure 2. The difference between the core CPI and the price index of food between 1960 and 2011.

References

1. Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.

Modeled share price of Franklin Resources (BEN) forecasts a fall

The price model for Franklin Resources (BEN) is a brand new one.  BEN is a financial company and was analyzed previously as a candidate for a bankruptcy [1]. The obtained model is based on is our stock pricing concept and includes the consumer price index of food at home (FH) and the index of tobacco and tobacco products (TOB). The former defining CPI component led the share price by 5 months and the latter one by 8 months. Therefore, the model has a natural 5-month forecast horizon. Figure 1 depicts the overall evolution of the involved indices. These two defining CPI components provide the best fit model between March 2011 and July 2010.  Both coefficients are negative, as in many models already reported in this blog, and thus the increasing prices result in decreasing share price. The slope of time trend is positive and would provide a $55 increment per year if both CPIs are fixed. The best-fit 2-C model for BEN(t) is as follows:

BEN(t) = -6.33FH(t-5) – 0.27TOB(t-8) – 55.08(t-1990) + 547.67     

where t is calendar time.  The standard deviation of $7.21 between July 2003 and March 2011. There was no growth during  the first quarter of  2011 since no one of the defining indices has demonstarted any big movement. In the second quarter of 2011, the price may drop to the level of $100 from the current $125, as follows from the predicted and observed curves presented in Figure 2.  Figure 3 displays the model error which was low after 2008.

Figure 1. The evolution of FH and TOB.

Figure 2. Observed and predicted BEN share prices.

Figure 3. The model residual, i.e. the difference between the observed and predicted BEN share prices.

1. Kitov, I. (2010). Modelling share prices of banks and bankrupts, Theoretical and Practical Research in Economic Fields, ASERS, vol. I(1(1)_Summer) pp. 59-85

AFL stock price model

Aflac Incorporated (AFL) is a financial company in the S&P 500 list. Using new CPI estimates published by the BLS on April 14 we have estimated a preliminary model.  The share price is defined by the consumer price index of household furnishing and operations (HFO) and that transportation services (TS). The defining time lags are as follows: the HFO index leads the share price by 2 months and the TS by 4 months.

Both coefficients in the obtained model are negative. Therefore any growth in both indices causes the share price to fall with a several month delay. The slope of time trend is positive and provides an increment of $20.4 per year. The intercept is $997.7. The best-fit 2-C model for AFL(t) is as follows:

AFL(t) =  -5.02HFO(t-2) – 2.87TS(t-6)  + 20.42(t-1990) + 997.71

where t is calendar time.

The predicted curve in Figure 1 leads the observed price by 2 months with the residual error of $3.94 for the period between June 2003 and March 2011. During the second quarter of 2001, the share price has to decrease to the level of $50.

Figure 1. Observed and predicted AFL share prices.

CVS Caremark Corporation in 2011Q2

CVS Caremark Corporation (CVS) is an old member of our list for stock price modeling. We have been following the CVS share  since 2009, i.e. since we started developing our concept of share pricing as related to consumer price indices. The original CVS model has been very stable over the past two years and it provides an overall validation for the deterministic share price setting. A very exciting feature of the CVS price model we developed two years ago is the possibility of prediction at a 3 months horizon.

Using new CPI estimates published by the BLS on April 14 we have updated the model and found that the CVS model has not been changing much and is still defined by the consumer price index of other food at home (OFH) and that transportation services (TS). A slight difference consists in smaller time lags: the OFH index leads the share price by 3 months and the TS - by 4 months.

Figure 1 depicts the overall evolution of both involved indices. These two defining components provide the best fit model between August 2009 and March 2011. Relevant coefficients are both negative. Therefore any growth in both indices causes the share price to fall with a several month delay. The slope of time trend is positive and provides an increment of $12 per year. The intercept of $199 is necessary to compensate the difference in the initial values of both indices.

The best-fit 2-C model for CVS(t) is as follows:

CVS(t) = -0.48OFH(t-3) – 1.26TS(t-4) + 12.11(t-1990) + 199.16

where t is calendar time.

The predicted curve in Figure 2 leads the observed price by 3 months with the residual error of $1.82 (was $1.88 in January 2011) for the period between June 2003 and March 2011. The model provides and an excellent and very stable prediction of the share price in the past.

In January we forecasted a period of no growth in the first quarter of 2011. This prediction was successful and thus validated the model. It is necessary to stress again that the model has been predicting the CVS share price since August 2009 with the same accuracy.

During the second quarter of 2001, the share price has to decrease by $2 according to an ace;eratedgrowth in the indices of other food at home and transportation services in Figure 1.

Figure 1. Evolution of the price of OFH and TS.

Figure 2. Observed and predicted CVS share prices. Black diamonds present the contemporary prediction shifted 3 months ahead to fit actual data.

Share price of Ashland Inc.

We have already presented a preliminary model for Ashland Inc (ASH). (The quantitative approach is described in [1].) Here we re-estimate the model using new BLS estimates of CPIs. Ashland is a chemical company in the S&P 500 list since 1983. The stock price was defined by the index of food without beverages (FB) and that of miscellaneous personal goods (MISG). Both indices might be directly related to major ASH products. Figure 1 depicts the overall evolution of both involved consumer price indices.  The best-fit 2-C model for ASH(t) is as follows:

ASH(t) = -4.06FB(t-2) – 3.11MISG(t-7) + 24.11(t-1990) + 719.56

Actually, the predicted curve in Figure 2 leads the observed price by 2 months with the residual RMS error of $4.23 (see Figure 3) for the period between March 2003 and March 2011. The evolution of the observed and predicted prices is synchronized and the model does predict the share price in the past and foresees at a two month horizon.

Both indices had a period of no growth between 2008 and 2010 and the price was driven by the time trend with the slope of +24.11. This effect resulted in the total growth of $50 during these two years. A slow growth in food price restarted in the end of 2010 and the share price stalled. In February and March 2011, the index of food grew from 222.9 to 225.3, i.e. by 3 units. All in all, the share has to fall by approximately $6 in the next two months.

Figure 1. Evolution of the price of FB and MISG.

Figure 2. Observed and predicted ASH share prices.

Figure 3. Residual error of the model.

References

1. Kitov, I. (2010). Deterministic mechanics of pricing. Saarbrucken, Germany, LAP Lambert Academic Publishing.

CIGNA Corporation stock price

We have estimated a model for CIGNA Corporation (CI). The company is associated with health service. The model for CI is stable during the past ten months. It is a deterministic one and has been defined by the consumer price index of pets, pet products and services (PETS) and transportation services (TS). The former CPI component does not lead the share price and the latter one leads by 3 months. Figure 1 depicts both involved indices. Relevant coefficients are both negative. Therefore the growth in both indices causes the share price to fall. The slope of time trend is positive. The best-fit 2-C model for CI(t) is as follows:

CI(t) =  -2.72PETS(t) – 1.63TS(t-3)  + 28.20(t-1990) +  299.39

where t is calendar time.

The predicted curve in Figure 2 repeats the measured one. The residual error is $3.46 for the period between June 2003 and March 2011. The model does not include a slight fall in the price in the second quarter since the current level is underestimated and corresponding correction might be negative.  

Figure 1. Evolution of the price of PETS and TS.

Figure 2. Observed and predicted CI share prices.